Summary Chapters Floor van Oers
Keller and DeVechio,
Natural Hazards: Earth's Processes as Hazards, Disasters, and
Catastrophes (3rd edition)
Course: Natural Hazards (GEO2-4211)
3rd period, 2nd year GSS
ECONOMICS
Making communities more flood resilient: The role of cost benefit analysis and other
decision-support tools in disaster risk reduction, sections 3 and 4 – Mechler et al
Section 3: Using Cost benefit analysis to make the economic case for flood disaster risk
reduction – overview and evidence
Cost Benefit Analysis (CBA): a framework which supports transparent decision making
based upon a common monetized yardstick that can be used to evaluate various risk
reduction strategies.
- Stream of discounted benefits exceeds the steam of discounted costs: economically
efficient
- Option with the highest net present value is optimal (can also be ‘doing nothing’)
DRR: disaster risk reduction
Four main steps for CBA:
1. Risk analysis
Estimate natural disaster risk and potential impacts defined as a function of hazard,
exposure and vulnerability
o Hazard
Frequency and intensity
o Exposure
Determine the locations of structures, and then which are at risk for
different water depths
o Intensity
Susceptibility to damage of the structures at risk
Physical impact of a hazard
Mean loss with a given hazard level, further defined in financial loss
1
,Summary Chapters Floor van Oers
2. Identification of risk reduction measures and associated costs
3. Analysis of risk reduction
o Use the EP (exceedance probability) curves with and without mitigation in
place coupled with estimates of upfront costs to undertake sensitivity
analysis to determine the relative cost-efficiency of a mitigation measure.
Two cases: one with the highest economic efficiency and the one with
the lowest.
4. Calculation of economic efficiency
o Net present value (NPV): costs and benefits arising over time are discounted
and the difference is taken (net discounted benefit for a certain year). Add up
2
,Summary Chapters Floor van Oers
all the years and that’s NPV. A fixed discount rate is used for all the years. →
NPV+, project is considered desirable.
o Benefit cost ratio: variant of NPV. Total discounted benefits are divided by
the total discounted costs. BCR > 1, project is cost effective and should be
implemented, BCR<1 not. → benefits per costs; very intuitive.
o Economic rate of return: calculate the interest rate internally, which is called
the return of the project. Considered desirable if the ERR > average return on
the project determined beforehand. Basically calculate discount rate with
NPV=0.
Ex ante: before the event
Ex post: after the event
DRR strategy categories for watershed:
- Structural and non-structural (levees, dams, etc)
- Exposure and property modification (zoning and land use planning etc)
- Behavioural (information, education, forecasts, etc)
‘Floodplain restoration’ and ‘early warning systems/forecasts’ have the highest
Benefit Cost ratio according to Hawley et al (2012).
Exposure and behavioural modification are the least utilized strategies for
watershed locations.
Three main geographic classifications for watershed locations:
- Deltaic (where the river reaches the sea)
- Central (areas defined by gradual slope of terrain where the transporting capacity of
the river has slowed significantly and leading to deposition)
- Upper (where the gradient is high and increased velocity leads to erosion and
quicker flow streams)
Whether DRR leads to positive and large returns depends on project design, context, and
choices regarding DRR interventions.
Section 4: Opportunities and challenges of implementing a Risk-based CBA for flood
resilience
Implementing risk-based CBA methodology:
- Because disaster risk is probabilistic, DRR options are efficient for certain levels of
risks. However, for some risk financing is the better option.
- Costs are deterministic: they arise early in the process and are for sure.
- Benefits are probabilistic: they arise only in case of a disaster event occurring (the
costs are avoided, so they are seen as a benefit)
o Risks are also probabilistic: they do not happen frequently, and benefits are
only acclaimed if they happen.
???? Layers of risk:
- Low to medium loss risks that happen relatively frequently, prevention is more
efficient than insurance
- Lower consequence events are more easily financed through their own means
3
, Summary Chapters Floor van Oers
- Lower probability hazards: insurance
- For low-frequency hazards which happen almost never most individuals find it too
costly to insure or reduce risks.
The most attractive flood risk reduction: highest BCR and assuming there are no constraints
with respect to the cost of the investment
Economic efficiency metric:
- Vulnerability of the exposed structure
- The hazard level of the area
- Cost of the measure discussed
Direct risk influences the development process via e.g. direct damage to productive assets.
Indirect risk influences development via interactions with the state and its development and
disaster resilience.
Exceedance probability (EP) curves:
- Likelihood (y axis) that the damage does not exceed pre-specified levels (x axis)
- Inverse of EP is recurrency period: event with a recurrence of 100yrs will on average
only occur every 100yrs
- This can be translated in an expected annual loss that can be used for planning
purposes.
- Disaster risk reduction moves the EP curve to the left (lower probability of losses)
Challenges for risk-based CBA:
- Properly accounting for issues and elements of measuring risk → data availability
o Hazard probability
o Damage assessment
o Vulnerability assessment
o Exposure assessment
o Identifying the benefits
o Discounting the future
- Valuing indirect and intangible (non-monetary) losses
o Direct impact: immediate effect due to contact with the hazard
o Indirect impact: occurs as a result/response to the direct impact in the
medium/long term.
o Tangibles: impacts that have market value and can be expressed in money
o Intangibles: non-market impacts, such as health or impacts on natural
resources
- Assessing portfolios of systemic interventions vs. single interventions
o Systemic intervention: focus on bolstering resilience in terms of maintaining
key system functions rather than reducing source-specific risks.
Hard resilience: strengthening of structures and physical components
of systems
Soft resilience: set of less tangible and process-oriented measures as
well as policy; preparedness
- Accounting for uncertainty
4
Keller and DeVechio,
Natural Hazards: Earth's Processes as Hazards, Disasters, and
Catastrophes (3rd edition)
Course: Natural Hazards (GEO2-4211)
3rd period, 2nd year GSS
ECONOMICS
Making communities more flood resilient: The role of cost benefit analysis and other
decision-support tools in disaster risk reduction, sections 3 and 4 – Mechler et al
Section 3: Using Cost benefit analysis to make the economic case for flood disaster risk
reduction – overview and evidence
Cost Benefit Analysis (CBA): a framework which supports transparent decision making
based upon a common monetized yardstick that can be used to evaluate various risk
reduction strategies.
- Stream of discounted benefits exceeds the steam of discounted costs: economically
efficient
- Option with the highest net present value is optimal (can also be ‘doing nothing’)
DRR: disaster risk reduction
Four main steps for CBA:
1. Risk analysis
Estimate natural disaster risk and potential impacts defined as a function of hazard,
exposure and vulnerability
o Hazard
Frequency and intensity
o Exposure
Determine the locations of structures, and then which are at risk for
different water depths
o Intensity
Susceptibility to damage of the structures at risk
Physical impact of a hazard
Mean loss with a given hazard level, further defined in financial loss
1
,Summary Chapters Floor van Oers
2. Identification of risk reduction measures and associated costs
3. Analysis of risk reduction
o Use the EP (exceedance probability) curves with and without mitigation in
place coupled with estimates of upfront costs to undertake sensitivity
analysis to determine the relative cost-efficiency of a mitigation measure.
Two cases: one with the highest economic efficiency and the one with
the lowest.
4. Calculation of economic efficiency
o Net present value (NPV): costs and benefits arising over time are discounted
and the difference is taken (net discounted benefit for a certain year). Add up
2
,Summary Chapters Floor van Oers
all the years and that’s NPV. A fixed discount rate is used for all the years. →
NPV+, project is considered desirable.
o Benefit cost ratio: variant of NPV. Total discounted benefits are divided by
the total discounted costs. BCR > 1, project is cost effective and should be
implemented, BCR<1 not. → benefits per costs; very intuitive.
o Economic rate of return: calculate the interest rate internally, which is called
the return of the project. Considered desirable if the ERR > average return on
the project determined beforehand. Basically calculate discount rate with
NPV=0.
Ex ante: before the event
Ex post: after the event
DRR strategy categories for watershed:
- Structural and non-structural (levees, dams, etc)
- Exposure and property modification (zoning and land use planning etc)
- Behavioural (information, education, forecasts, etc)
‘Floodplain restoration’ and ‘early warning systems/forecasts’ have the highest
Benefit Cost ratio according to Hawley et al (2012).
Exposure and behavioural modification are the least utilized strategies for
watershed locations.
Three main geographic classifications for watershed locations:
- Deltaic (where the river reaches the sea)
- Central (areas defined by gradual slope of terrain where the transporting capacity of
the river has slowed significantly and leading to deposition)
- Upper (where the gradient is high and increased velocity leads to erosion and
quicker flow streams)
Whether DRR leads to positive and large returns depends on project design, context, and
choices regarding DRR interventions.
Section 4: Opportunities and challenges of implementing a Risk-based CBA for flood
resilience
Implementing risk-based CBA methodology:
- Because disaster risk is probabilistic, DRR options are efficient for certain levels of
risks. However, for some risk financing is the better option.
- Costs are deterministic: they arise early in the process and are for sure.
- Benefits are probabilistic: they arise only in case of a disaster event occurring (the
costs are avoided, so they are seen as a benefit)
o Risks are also probabilistic: they do not happen frequently, and benefits are
only acclaimed if they happen.
???? Layers of risk:
- Low to medium loss risks that happen relatively frequently, prevention is more
efficient than insurance
- Lower consequence events are more easily financed through their own means
3
, Summary Chapters Floor van Oers
- Lower probability hazards: insurance
- For low-frequency hazards which happen almost never most individuals find it too
costly to insure or reduce risks.
The most attractive flood risk reduction: highest BCR and assuming there are no constraints
with respect to the cost of the investment
Economic efficiency metric:
- Vulnerability of the exposed structure
- The hazard level of the area
- Cost of the measure discussed
Direct risk influences the development process via e.g. direct damage to productive assets.
Indirect risk influences development via interactions with the state and its development and
disaster resilience.
Exceedance probability (EP) curves:
- Likelihood (y axis) that the damage does not exceed pre-specified levels (x axis)
- Inverse of EP is recurrency period: event with a recurrence of 100yrs will on average
only occur every 100yrs
- This can be translated in an expected annual loss that can be used for planning
purposes.
- Disaster risk reduction moves the EP curve to the left (lower probability of losses)
Challenges for risk-based CBA:
- Properly accounting for issues and elements of measuring risk → data availability
o Hazard probability
o Damage assessment
o Vulnerability assessment
o Exposure assessment
o Identifying the benefits
o Discounting the future
- Valuing indirect and intangible (non-monetary) losses
o Direct impact: immediate effect due to contact with the hazard
o Indirect impact: occurs as a result/response to the direct impact in the
medium/long term.
o Tangibles: impacts that have market value and can be expressed in money
o Intangibles: non-market impacts, such as health or impacts on natural
resources
- Assessing portfolios of systemic interventions vs. single interventions
o Systemic intervention: focus on bolstering resilience in terms of maintaining
key system functions rather than reducing source-specific risks.
Hard resilience: strengthening of structures and physical components
of systems
Soft resilience: set of less tangible and process-oriented measures as
well as policy; preparedness
- Accounting for uncertainty
4
